India and France have agreed to change their long-standing tax treaty, known as the Double Taxation Avoidance Convention (DTAC), which was first signed on 29 September 1992. The revised agreement was formalised during the recent visit of the President of France to India, and aims to modernise tax rules between the two countries, improve clarity for investors, and strengthen economic cooperation.

The updated treaty was signed by Ravi Agrawal, Chairperson of the Central Board of Direct Taxes, Government of India, and Thierry Mathou, the French Ambassador to India, on behalf of their respective governments.

At its core, the amendment changes how certain types of income are taxed between India and France. It adjusts dividend tax rates based on shareholding size, gives clearer rights on taxing capital gains, updates definitions used in the treaty, and removes a long-disputed provision called the Most-Favoured-Nation clause (MFN).

In a statement, the Ministry of Finance explained the core parts of the amended agreement:

• “The Amending Protocol provides full taxing rights in respect of capital gains arising from sale of shares of a company, to the jurisdiction where such company is a resident.”
  This means that if a company is based in India and a French investor sells its shares, India will have the right to tax the profit made on that sale.
• “The Amending Protocol also deletes the so-called Most-Favoured-Nation (MFN) Clause from the Protocol to the DTAC, thereby bringing to rest all issues relating to it.”
  The MFN clause had allowed France to claim any future tax benefits India gave to other countries also covered by its tax treaties. Removing it simplifies the agreement and prevents automatic claims based on deals with third countries.
• “The Amending Protocol also modifies the taxation of income from dividends by replacing a single rate of 10% of tax with a split rate of 5% for those holding at least ten percent of capital and 15% of tax for all other cases.”
  Under the earlier treaty, all shareholders paid a flat 10% tax on dividend income. Now, French investors with 10% or more ownership in an Indian company will pay a lower 5% tax, while those holding less than 10% will pay 15%.

The amended treaty is broader than dividend and capital gains tax changes. It also:

• Updates the definition of ‘Fees for Technical Services’ to align with how India defines it in its agreement with the United States. This gives both countries consistent rules on what kinds of service payments are taxable.
• Expands what qualifies as a ‘Permanent Establishment’ to include presence through services (known as Service PE), making it clearer when a business has taxable operations in another country.
• Improves provisions for the exchange of tax information and assistance in tax collection between India and France. This is in line with international tax standards and aims to prevent tax avoidance or evasion.
• Incorporates Base Erosion and Profit Shifting (BEPS) standards through the Multilateral Instrument (MLI), which had already been agreed separately by both countries. These rules help curb practices where companies shift profits to low-tax regions without real business activities.

The amended treaty will come into force only after both India and France complete their internal legal procedures. Once effective, it’s expected to provide clearer tax rules for Indian and French companies, encourage cross-border investment, and improve cooperation on tax matters.

Experts say that removing the MFN clause reduces future disputes and aligns the treaty with current global standards. For investors and multinational firms operating between the two countries, the updated dividend tax structure and capital gains provisions bring more predictability and clarity in how their income will be taxed.